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SOUTHERN JOURNAL OF AGRICULTURAL ECONOMICS
JULY, 1976
THE ECONOMICS OF BOLIVIAN SELFSUFFICIENCY IN WHEAT PRODUCTION*
Enrique Gomez D. and B. Delworth Gardner
INTRODUCTION
The primary purpose of this paper is to provide
estimates of the government subsidy that would have
to be paid to wheat producers if Bolivia is to reach
self-sufficiency in wheat. These estimates are then
utilized in a producer's surplus analysis to determine
whether or not such a policy would enhance the
economic welfare of the country.
Bolivia has a chronic deficit in wheat production.
Imports composed about 80 percent of consumption
in 1971, the last year of our data series (Table 1).
Domestic production in 1971 was roughly the same
as 14 years earlier, while imports have steadily
increased. A linear regression of imports on time
revealed an annual increment of imports of 7,748
metric tons (MT), whereas total annual consumption
increased by 8,833 MT. (Thus increases in imports
have supplied about 88 percent of the estimated
increases in consumption.) Requirements of foreign
exchange for wheat purchases have been heavy,
especially as Public Law 480 concessional sales have
been winding down and Bolivia has had to turn to
purely commercial transactions to satisfy her consumption requirements.
Efforts have been made, in recent years, to
introduce hard wheat varieties and better production
techniques in traditional wheat producing areas, but
results have not been very encouraging.
It has been noted by several researchers
[4, 2, 5, 6] that any significant increase in wheat
production would most probably have to come from
new areas opened in the lowlands of eastern Bolivia.
Plans exist in various ministries of the government of Bolivia to colonize new areas in the east, but
only one section in that region is undergoing significant change: that south of the triangle formed by the
Rio Grande and Ichilo rivers, which includes the
provinces of Ibanez, Santisteban, Sara, Warnes and
Ichilo, in the Santa Cruz department. In a country
characterized by traditional subsistence-type agriculture, with slow and limited responses to market
incentives, the Santa Cruz area presents a contrasting
picture of rapid growth and high response to market
incentives [1].
Wheat production in Santa Cruz is of negligible
importance now, but technical feasibility has been
demonstrated as a winter rotation crop with cotton.
"Adequate yielding, disease-tolerant, well-adapted
varieties are available and sufficient seed can be
produced. There is enough rainfall for an average
yield of 1200 kilos per hectare. Additionally, in
rotation with cotton, insect problems can be
reduced... " [5].
Government policy in Bolivia has been directed
towards domestic production of previously imported
agricultural goods. The principal justification for
import substitution has been to save foreign exchange. This policy has been successful with sugar
cane and rice, and the country is now self-sufficient
in each. The next government target appears to be at
least partial elimination of the wheat production
deficit. At the same time, increasing wheat and/or
flour prices to dramatically stimulate production
response is a potentially explosive political issue
because of the high fraction of population that uses
The authors are respectively Economist, USAID, Paraguay and Professor, Department of Economics, Utah State University.
*This paper is based on a section of the first author's dissertation, "Economic Analysis of the Agricultural Sector in Santa
Cruz, Bolivia," written at Utah State University, 1974.
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TABLE 1. WHEAT PRODUCTION AND IMPORTS IN BOLIVIA, 1950-71
Imports
Year
Production
MT
Consumption
MT
MT
Percent of Total
. Consumption
Consumption
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
45,652
31,326
24,163
20,581
17,000
17,000
40,000
45,000
64,300
62,260
40,000
35,000
40,000
55,200
57,900
55,000
57,900
27,000
45,000
53,000
43,912
61,029
103,501
109,172
120,499
107,593
102,458
81,573
73,553
186,573
157,072
175,644
146,875
179,340
191,528
216,092
195,043
220,571
204,636
229,665
250,573
244,905
250,211
291,086
57,849
77,846
96,336
87,012
85,458
64,573
33,553
141,573
92,772
113,384
106,875
144,340
151,528
160,892
137,143
165,571
163,636
202,665
205,573
191,905
206,299
230,057
55.9
71.3
79.9
80.9
83.4
79.2
45.6
75.9
59.1
64.6
72.8
80.5
79.1
74.5
70.3
75.1
80.0
88.2
82.0
78.4
82.5
79.0
SOURCE:
Gomez, Enrique et. al., "Estudio del Trigo," Ministerio de Agricultura y Ganaderia, 1972.
wheat products as its nutrient staple [4]. Every new
government that comes to power continues to keep
the prices of bread and flour far below world market
levels. In this analysis it is assumed that consumer
prices remain at these "low" levels.
After the 67 percent devaluation of Bolivian
currency [the monetary unit is the peso boliviano
80
($b.)] with respect to the U.S. dollar in 1972, the
government required an incentive price to be paid by
flour mills to wheat producers. In turn, a subsidy was
paid to millers, since the flour price was also
controlled. There have been minor changes in these
payments over the years, but the character of the
policy is unchanged since 1972.
THEORY AND EMPIRICAL METHODS
p
Two wheat producing areas are considered in this
analysis: the traditional areas, mainly in the Central
Valleys of Bolivia, and the newly colonized areas in
Santa Cruz. They are represented by the hypothetical
supply curves S1 and S2 , respectively (see Figure 1).
The total supply function for wheat production in
Bolivia is S, the horizontal sum of S1 and S2 at given
prices. D represents the domestic demand for wheat.
To reach self-sufficiency in supply, while maintaining the current pegged demand price at PA, QB
must be produced. The supply price of wheat would
have to be PB to induce QB. At price PB, QQB 1
would be produced in traditional areas and QQB2 in
the Santa Cruz region.
The empirical supply function for traditional
areas was derived by assuming unitary price elasticity
and taking the 1971 estimate of wheat production in
Bolivia as a base.'
The potential wheat supply function for the
Santa Cruz area was obtained by means of a linear
program, using alternative incentive prices paid to
wheat producers. Physical and economic data were
collected from a sample survey of farmers in the
study area. Average product and factor prices and
farm size of the area were utilized. The objective
function of the linear program to be maximized was
expected net returns accruing to agricultural producers. Coefficients of the aij matrix were derived
directly from sample survey data. Operating capital
was not constrained since it was obtained primarily
from international loans that appeared to be ample
and available at favorable terms. A stepwise positively-
S1
s2
/
\
/
PA
I
i D
Q
QB1
QB2
0
FIGURE 1. WHEAT SUPPLY AND
CURVES
QB
DEMAND
sloped labor supply function with an elasticity of two
was estimated for different wage rates.2
Land constraints were set for each province in
the region that reflected total land available for
mechanized production (cleared of tree stumps), total
land presently in use, and finally the additional
amounts of land that feasibly could be brought into
production after being cleared. 3 Maximum production constraints were placed on sugar cane (based on
present milling capacity), on rice (based on total
domestic demand) and on soybeans (based on
planned milling capacity).
WHEAT SUPPLY RESPONSE AND
WELFARE ANALYSIS
As the price of wheat increased parametrically in
the model, quantities produced increased until a
maximum of 4.84 million cwt. (approximately
220,000 MT) was reached at the $b. 100 cwt. price
(approximately $3 per bushel). 4 No further response
Worldwide estimates of supply elasticity for wheat production have been compiled by Johnson and Krishna [6, 7].
Johnson reports a short-run price elasticity of supply of .7 to 1.3, estimated by Hutchinson, Naive and Tsu for Argentina,
Bolivia's neighbor on the South. Long-run elasticities tend to be higher as do those for more advanced countries. Krishna's
estimates tend to be lower: (1) .31 for rice in India during 1914-15 for the short-run and .59 for the long-run, (2) for cotton
during 1948-61, .64 in the short-run and 1.33 in the long-run, and (3) for wheat during 1914-43, .08 in the short-run and .14 in
the long-run. The problem with Krishna's wheat data is that the time period covered was pre-World War II, and elasticities were
acreage responses to price rather than output responses. Economic theory would suggest that output responses to higher prices
should be higher than acreage responses, since other inputs would presumably be utilized more intensively.
2
The quantity of locally available agricultural labor was estimated to be 52,038 persons at the full employment level. It was
assumed that it would be available at current wages. Additional amounts could be attracted from other areas at higher wage rates.
Our best estimates, based on information from the area, indicated that the quantity of migrant labor available would increase in
steps of 25,000 men for wage increments of $b. 1.00 per day. (The current exchange rate is $b. 20 for one American dollar.)
From such a labor supply schedule, a marginal factor cost curve (MFC) was constructed. Each increment in hired labor would
mean higher wages not only for the imported labor, but for those already working in the area. Each point on the MFC curve was
calculated using the equation: MFC=P(1=1/E) where P is the wage rate on the supply schedule, and E is the assumed supply
elasticity.
Bolivia is a country where about 80 percent of the population is engaged in subsistence farming, with many densely
populated agricultural areas. There must be considerable underemployment of agricultural labor. Of course, to move this labor
from areas of current employment to the Santa Cruz region implies an increase in the wage rate.
The total labor supply schedule considered was 250,000 persons, which is about 20 percent of the total agricultural labor
supply in the country. It was difficult for us to conceive conditions that would "pull" more workers than this into the new Santa
Cruz region, except in the very long run.
3The quantity of land available for mechanized production, including total land presently in use, was estimated basically
from a production survey made by the Office of Statistics of the Ministry of Agriculture. Figures on land that could be cleared
were estimated from soil maps published by the British Mission in Santa Cruz [3].
4
It must be emphasized that we are dealing here with relative prices; i.e., when wheat price reaches $b. 100 and all other
product prices remain unchanged. This note of caution is needed because nearly all prices in Bolivia are currently rising rapidly.
The absolute price for wheat has already risen above $b. 100 (September 1974) but relative price has not changed as much.
81
was noted, even if price were increased to $b. 150 per
cwt. (Table 2). The reason is that wheat production
had reached the land constraints in all five provinces.
Wheat production in the entire country was
estimated at 1,326,715 cwt. in 1971 [6], and
guaranteed prices paid farmers at the mills were
$b. 46.0 and 52.0 per cwt. for native and hard wheat
varieties, respectively.
Total consumption
was
8,045,400 cwt., however. If the foregoing analysis is
valid, it appears that higher incentive prices could
sharply reduce wheat imports, but the price would
have to reach "fantastic" levels before self-sufficiency
could be attained. It must be emphasized, moreover,
that it has not been demonstrated that any increased
domestic supply would be economically efficient, i.e.,
benefits of the incentive price program would more
than offset the costs.
Proceed with the welfare analysis of such a
program. After deductions were made for hectolitric
weight and impurities, it was estimated that average
price received by wheat producers in Santa Cruz
department was $b. 46.75 per cwt. in 1971.
After the 67 percent devaluation of currency in
1972, it was estimated that domestic factor prices
increased by about 40 percent by the end of the
following year. It is roughly estimated that the
general price level of the economy had increased by
about 50 percent at the time of the study (June
1973). Presumably, the price of wheat had followed
this trend in inflation (50 percent increase), i.e., from
$b. 46.75 to $b. 70.12 per cwt. Therefore, the 1971
estimate of domestic wheat production was probably
produced at the adjusted relative price of $b. 70.12
cwt. after devaluation.
As explained earlier, a land constraint was put on
wheat production in the new provinces as a first cut.
For purposes of viewing whether self-sufficiency is a
"reasonable" goal, those constraints still seem fairly
realistic. If so, it seems hopeless for Bolivia to think
in terms of self-sufficiency in wheat production in the
near future, especially if consumer prices are pegged
far below free-market levels. In order to address the
question of whether or not supply response to
incentive prices is economically efficient, however,
liberalize the constraints on land as it becomes more
and more profitable to produce wheat as its relative
price rises. This may require that other crops will be
displaced by wheat and/or that newly-cleared land
will be brought into production in still other provinces in the Santa Cruz area.
5
TABLE 2. WHEAT SUPPLY RESPONSE TO INCREASED PRICES IN SANTA CRUZ
Land Presently in Use Newly Cleared Land
$b/cwt Hectares
cwt
Hectares
cwt
a
Total
Hectares
cwt
70.12
24,483
489,667
24,483
489,667
78.07
24,483
489,667
128,858
2,577,152
153,341
3,066,819
80.00
24,483
489,667
128,858
2,577,152
153,341
3,066,819
85.00
22,999
459,980
131,072
2,621,439
154,071
3,081,419
90.00
23,360
467,190
137,291
2,745,813
160,651
3,213,003
95.00
23,360
467,190
137,291
2,745,813
160,651
3,213,003
100.00
50,519
1,010,374
191,705
3,834,094
242,224
4,844,468
150.00
50,519
1,010,374
191,705
3,834,094
242,224
4,844,468
---
aIt is assumed that 15 percent of this land will be
cleared annually until the maximum available level is reached.
The situation is depicted in Figure 2. Assume
consumer price is fixed and that total demand at that
price is also fixed. Also, assume that the supply
curves for traditional wheat areas and the Santa Cruz
area are as shown.
The derived demand curve facing Santa Cruz
producers can be regarded as total demand minus the
supply from traditional areas, yielding the Santa Cruz
demand as shown. Santa Cruz supply and demand do
not intersect because of constraints put on land in
wheat, as previously explained. This gives rise to
skepticism about Bolivia's ability to be self-sufficient
in wheat.
Suppose, however, that by removing land constraints the supply curve moves along the dotted line
in Figure 2 until it intersects demand at a price of
$b. 150.5 If the government desires to maintain a
constant relative wheat price of $b. 70.12 per cwt.
for consumers (which is also assumed to be the price
of imported wheat), while attaining self-sufficiency in
production, the subsidy to producers would have to
cover the gap between $b. 150.0 and $b. 70.12 per
cwt. In consequence, a subsidy of $b. 79.88 per cwt.
(113.92 percent of the consumer price) would be
needed to raise domestic production to 8,045,400
cwt. This would require a subsidy payment of
$b. 642.66 million annually.
Since the wheat supply curve for traditional areas
had been assumed unitary elastic, quantity supplied
from that area at $b. 150 would increase also by
113.92 percent, or from 1,326,715 to 2,838,109 cwt.
The gain in producer's surplus in the traditional
This assumption permits us to force self-sufficiency at an incentive price of $b. 150. We can then proceed to determine the
welfare implications. The choice of an intersection price of $b. 150. is no doubt arbitrary, but implies an elasticity of supply of
about .025 which does not seem unreasonable given the difficulty of bringing new acreage into production.
82
Price
$b/cwt
Traditional areas supply
Total
Demand
140
130 -
I
120 110100 90 -
Santa Cruz
Supply
^'
/
80
80 --
Santa Cruz
Santa
emandCruz
\Demand
70 -
0
1
2
3
4
5
6
7
8
Quantity
(cwt. lO6)
FIGURE 2. WHEAT DEMAND AND SUPPLY ESTIMATES WHEN A PRICE SUBSIDY TO CONSUMERS IS
IN EFFECT
areas would be approximately 116.34 million of
pesos bolivianos, calculated as follows:
($b.79.88X1.327 million cwt.)+($b.79.88X1.51 million cwt.)/2.
The gain in producer's surplus in the Santa Cruz
area is composed of two parts. First, it is represented
by increase in total net returns to agricultural
producers, as wheat prices are raised from $b. 70.12
to $b. 100 per cwt.;6 that is, the increase in value of
the objective function in the linear program. 7 The
value of the objective function increased from 704.61
to 843.72 million pesos bolivianos, representing a net
increase of 139.11 million pesos bolivianos. Secondly,
the remainder of the producer's surplus captured in
the Santa Cruz area is calculated geometrically by
moving along the assumed supply curve (dotted line,
Figure 2) as the price is increased from $b. 100.0 to
$b. 150.0 per cwt. This gain in producer's surplus is
estimated to be 252.50 million pesos bolivianos. s The
total gain in producer's surplus in the Santa Cruz
area, resulting from the wheat price rise of $b. 70.12
to 150.0 per cwt., is thus 139.11+252.50=391.61
million pesos bolivianos.
To assess the overall impact of price subsidy on
total welfare, government expenditure of 642.66
million pesos bolivianos 9 must be weighed against
total gain in producer's surplus, both in traditional
areas and in Santa Cruz ($b. 391.61+166.34=
557.95 million).
No change in consumer surplus exists, since real
price to consumers and quantity consumed are
assumed to be the same with price subsidy to
producers as without it. Net social cost of implementing a program of self-sufficiency in wheat production,
without an increase in price paid by consumers, is
estimated by subtracting total gain in producer
6It is assumed that after the price reaches $b. 100, the supply curve takes the shape of the broken line in Figure 2, and
proceeds until it intersects the demand at price $b. 150. This assumption is consistent with the conclusion reached earlier that
there is no further acreage response after the price reaches $b. 100 (see Table 2).
7
Net returns to agricultural producers represent the revenues remaining after all input purchases have been covered. Thus,
the value of the objective function is similar in concept to rent accruing to the resources owned by the farmer and producer's
surplus as traditionally defined.
8This calculation was made as follows: [(4.8 million cwt.x$b.50)+(.5 million cwt.x$b.50)] /2.
9
Calculated as [($b.150-$b.70.12)x8.0454 million cwt.].
83
surplus from government expenditures for the price
subsidy: 642.66-557.95=84.71 million pesos
bolivianos.
The conclusion is that if the government is
determined to maintain "low" wheat prices to consumers, costs of a subsidy to induce national wheat
production self-sufficiency seem to be greater than
benefits to wheat growers in the form of producer
surplus arising from the subsidy.
This analysis neglects several important factors,
however. One set of issues relates to income distribution. If the government collects revenues used to pay
the subsidy to "poor" farmers from "rich" merchants, landholders, etc., then income distribution
"gains" might well offset efficiency "losses" of the
subsidy program. Alternatively, there is no reason to
assume that present consumer prices and
consumption are optimum. If prices to consumers
were allowed to rise, then consumption would decline
and losses of consumer surplus would have to be
considered along with changes in producer surplus in
order to arrive at an efficiency optimum. Thus,
elasticity of demand would also be of crucial
importance.
Finally, this analysis was completed before the
"huge" increases in world price of food grains
occurred. At the time of the study, consumer wheat
prices in Bolivia were reasonably close to world
prices. The current situation has not been carefully
studied, but consumer prices utilized in this study are
equivalent to prices of about $2 per bushel. World
prices are currently much higher. The opportunity
cost to the Bolivian economy of supplying domestic
wheat is world price. Given high world price, the
Bolivian government may well subsidize some increases in domestic production more cheaply than
buying wheat in world markets. In fact, the price of
$b. 150 per cwt. (or $4.50 per bushel) needed to
stimulate large supply increases suggested in this
study, is not far above recent world wheat prices.
REFERENCES
[1] Analisis Socio-Economico del Departmento de Santa Cruz de la Sierra (Bolivia). Comision Economica para
America Latina, United Nations, Volume IV, April 1972.
[2] Arce, Lucio. Ciclo de Conferencias-Simposium sobre Produccion de Trigo en Bolivia, Instituto National del
Trigo, Sociedad de Ingenieros Agronomos de Bolivia, Boletin Tecnico No. 9, June 1970.
[3] Cochrane, Thomas T. "El Potencial Agricola del Uso de la Tierra en Bolivia," Mission Britanica en
Agriculture Tropical, Bolivia, 1973.
[4] Gardner, B. Delworth. The Economics of an Increase in Wheat Production in Bolivia, Utah State University,
RDD, USAID, Bolivia, USU Series 13/66, May 1966.
[5] Gibler, John W. The Bolivian Wheat Program, Santa Cruz: A Review and Evaluation, USAID, RDD,
USU-Bolivia, USU Series 26/72, July 1972, (mimeographed), Instituto Nacional del Trigo, Boletin
Informativo No. 1, July 1972.
[6] Gomez, Enrique, et. al. "Estudio del Trigo," Ministerio de Agricultura Y Ganaderia, Utah State University,
USAID, Bolivia, October 1972, Table 43.
[7] Johnson, D. Gale. World Agriculture in Disarray, Trade Policy Research Center, London, 1973, p. 114.
[8] Krishna, Raj. "Agricultural Price Policy and Economic Development," Agricultural Development and
Economic Growth, Herman M. Southworth and Bruce F. Johnston, eds., New York: Cornell University
Press, 1967, pp. 507-07.
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